Real Exchange Rates, Current Accounts and Competitiveness Issues in the Euro Area

Rajmund Mirdala ()

No 173, FIW Working Paper series from FIW

Abstract: The lack of nominal exchange rate flexibility in the monetary union induced the growing divergence of trade performance among the member countries. Intra-Eurozone current account imbalances among countries with different income levels per capita fuel discussions on competitiveness channels under common currency. Asynchronous current account trends between North and South of the Euro Area were accompanied by significant appreciations of real exchange rate in the periphery economies originating in the strong shifts in consumer prices and unit labor costs in these countries relative to the countries of the Euro Area core. The issue is whether the real exchange rate is a significant driver of persisting current account imbalances in the Euro Area considering than, according to some authors, differences in domestic demand are more important than is often realized. In the paper we analyze main aspects of current account adjustments in the Euro Area member countries. From estimated VAR model we calculate impulse-response function of the current account to the real exchange rate (REER calculated on CPI and ULC base) and domestic demand shocks and variance decomposition to examine the relative importance of both shocks. Our results indicate that while the prices and costs related determinants of external competitiveness affected imports more significantly than exports, demand drivers shaped current account balances mainly during the crisis period.

Keywords: current account; real exchange rate; economic crisis; vector autoregression; impulse-response function; variance decomposition (search for similar items in EconPapers)
JEL-codes: C32 F32 F41 (search for similar items in EconPapers)
Pages: 50
Date: 2016-12
New Economics Papers: this item is included in nep-acc, nep-eec and nep-opm
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Working Paper: Real Exchange Rates, Current Accounts and Competitiveness Issues in the Euro Area (2015)
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